Report finds financial firms’ advice on fund rollovers not in the best interest of holders

Money management firms frequently offer workers misleading and self-serving information about how to handle their retirement savings when they change jobs, according to a recent report by congressional auditors.

The Government Accountability Office found that financial firms often encourage departing workers to roll over a 401(k) into an individual retirement account, or IRA, run by the firms that already manage their retirement money, even when that might not be the best option.

The GAO report said the guidance workers currently receive is either too complex or too general, leaving them vulnerable to financial firms that may try to steer them toward IRAs with higher fees. Having workers move their money into IRAs typically allows money management companies to harvest bigger fees for handling the retirement money.

“Labor regulations do not ensure that 401(k) plans provide complete and timely information to participants on all their distribution options,” said the GAO report, which was released Wednesday.

Workers changing jobs also have the option of leaving retirement funds in the previous employer’s plan, moving funds to a new employer’s 401(k), or cashing out the plan, which incurs hefty taxes if the employee is younger than 59½.

GAO undercover investigators contacted 30 firms and reported that seven incorrectly said their IRA was free or that there were no fees to open or maintain an IRA account even though workers would incur ongoing fees by opening the accounts. The report also said five of the 10 large firm websites that GAO reviewed incorrectly claimed their IRAs were free. Fee information on the websites was hard to find and understand, the report found.

“The financial services industry spends substantial time and effort into marketing IRAs that may not be in the best interests of account holders,” said Rep. George Miller, D-Calif. “This comes as no surprise, since IRAs often come with higher costs when compared to a 401(k).”

The GAO report comes amid concern among policymakers about the increasing number of Americans who are unprepared for retirement. Profound changes in the nation’s employee benefit structure and growing calls to trim Social Security and Medicare spending, the mainstays of retirement security, have left workers with a greater burden to prepare for their retirements.

But many are not meeting the challenge. About half of employees have no retirement plan at work. And among the private-sector workers who do, only one in five is covered by a pension that guarantees them a set amount of income throughout their retirement. The others are covered by defined contribution plans such as 401(k)s. But, experts say, workers often do not save enough or they too frequently tap the money for non-retirement purposes.

Besides allowing workers to save for retirement, the $3.5 trillion they have in 401(k)s provides a lucrative stream of revenue for fund managers. Rollovers are now the largest source of contributions to IRAs, the GAO report said. More than 90 percent of funds flowing into traditional IRAs between 1996 and 2008 came from rollovers, with the vast majority coming from employer-sponsored retirement plans.